In: Accounting
Baird Home Maintenance Company earned operating income of $6,587,900 on operating assets of $58,300,000 during Year 2. The Tree Cutting Division earned $1,242,260 on operating assets of $6,940,000. Baird has offered the Tree Cutting Division $2,070,000 of additional operating assets. The manager of the Tree Cutting Division believes he could use the additional assets to generate operating income amounting to $432,630. Baird has a desired return on investment (ROI) of 9.30 percent.
Required
Calculate the return on investment for Baird, the Tree Cutting Division, and the additional investment opportunity.
Calculate the residual income for Baird, the Tree Cutting Division, and the additional investment opportunity.
a. ROI= OI / OA
Baird Home Maintenance
ROI = $6,587,900 / $58,300,000
Return on investment is 11.30%
Tree Cutting Division
ROI= $1,242,260 / $6,940,000
Return on Investment is 17.90%
Additional Investment Opportunity:
ROI= $432,630 / $2,070,000
Return on Investment is 20.90%
b. RI= OI -( OA x Desired ROI)
Baird Home Maintenance
RI= $6,587,900 - ($58,300,000 x 0.093)
Residual Income is 1,166,000
Tree Cutting Division
RI= $1,242,260 - ($6,940,000 x 0.093)
Residual Income is 596,840
Additional Investment Opportunity:
RI = $432,630 - ($2,070,000 x 0.093)
Residual Income is 240,120
a.
Baird Home Maintenance
Return on investment is 11.30%
Tree Cutting Division
Return on Investment is 17.90%
Additional Investment Opportunity:
Return on Investment is 20.90%
b.
Baird Home Maintenance
Residual Income is 1,166,000
Tree Cutting Division
Residual Income is 596,840
Additional Investment Opportunity:
Residual Income is 240,120